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Tuesday, June 22, 2010

How to (or not to) take investment decisions - another reader exercise

Many small investors with limited resources at their disposal are often faced with investment decisions where they need to choose from several options. Some practical situations, described below, will be the basis of another reader exercise.

There are no 'right' or 'wrong' answers because investors have different priorities and risk tolerance. The objective of the exercise is to make you aware of your own decision making process and what type of an investor you are.

So have no fears about participating. A couple of lines explaining each choice will get additional 'brownie' points. I will post an analysis of the responses next week, and acknowledge the reader with the most logical answers.

Q1. Your fixed deposit of Rs 100,000 in a bank has just matured.  Will you:

(a) Renew the fixed deposit - even though the current rates are lower?

(b) Keep it in your savings account till the expected interest rate increase takes place, and then renew?

(c) Invest in the fixed deposit schemes at higher interest rates being offered by different companies?

(d) Invest it in mutual fund units?

(e) Invest it in shares?

Q2. You have decided to purchase mutual fund units in an equity fund. Will you:

(a) choose the growth option?

(b) the dividend re-investment option?

(c) the dividend payout option?

Q3. Every one seems to be buying gold and gold prices are at an all-time high. Will you:

(a) follow the crowd and buy a few gold coins/biscuits?

(b) buy units in a gold fund?

(c) buy gold ETF units?

(d) refrain from buying till prices drop?

Q4. You had bought 500 shares of a small cap company about 2 months back. After stagnating for a while, the price recently shot up by 25%. Will you:

(a) sell all 500 shares and book short-term profits?

(b) sell 250 shares and reduce your holding cost on the balance shares?

(c) hold on for higher prices?

(d) buy another 200 shares at the 25% higher price?

Q5. You had bought 1000 shares of another small cap company about 6 months ago. The stock has been stagnating since then. A recent announcement of 20% dividend and a stock-split perked up the price by 10%. Will you:

(a) use the up-tick in price to sell out?

(b) wait for the dividend and stock split and then decide?

(c) buy another 250 shares at the 10% higher price?

Q6. You have been holding a well-managed mid cap MNC company's stock for a couple of years. The company recently announced delisting of its shares from the stock exchanges at a buy-back price that was 15% higher than market. Subsequently the price has spurted by 30%. Will you:

(a) hold on with the hope that the company may increase the buy-back price?

(b) sell your entire holding at the current market price?

(c) sell 80% of your holding now, but keep 20% aside in case the company increases the buy-back price?

(d) sell to the company at the announced buy-back price?

12 comments:

Ramchandra said...

Dear Sir,
This is my honest attempt to answer your questions.
Q1.
(a) YES. I will go for renewal with central banks. As it’s safer and secure my portfolio/asset plan.
(b) NO. As I don’t know how long it takes for higher rates and FD return is more than saving.
(c) NO. I am bit afraid to invest in a company until unless I am sure about the business model or growth.
(d) NO. I prefer to invest in SIP rather than going at once for Mutual Fund.
(e) I never convert my FD money to Shares.

Q2.
(a) YES. I will choose the growth option.
(b) NO. I will say yes in case of option b and c. Growth is less.
(c) NO. We must leave money to grow. Not just earning profit and enjoy.

Q3.
(a) NO. Never follow the crowd.
(b) I don’t know.
(c) I don’t know.
(d) YES. I will wait for lower price. Crowd is buying now because it’s a very safe investment. I still believe once the investor confidence is back, then slowly gold will flow into stocks in the form of CASH. I may be wrong also.

Q4.
(a) NO. Never get down from moving train.
(b) YES. I will sell 250 shares and reduce your holding cost on the balance shares?
(c) NO. I won’t be greedy.
(d) NO. I feel it’s not safe to invest in share which has run up by 25% in just 2 months.

Q5.
(a) YES. I will come out with 10% profit as it could not perform for 2 quarters.
(b) NO. I will not wait for the dividend and stock split as it takes more time and also there is chance that stock can come down once the news is over.
(c) NO. I will not buy share which is struggling for SIX months.

Q6.
(a) I will not hold as market price is less than announced price. If I hold then it becomes a speculative stock.
(b) NO. I won’t sell at once
(c) YES. I will sell 80% of your holding now, but keep 20% aside in case the company increases the buy-back price with trailing stop loss.
(d) NO. I won’t sell to announce price as market price is 100% more than this price.


Kind Regards,
Ramchandra Hegde.

Joe said...

Dear Sir,

My replies as follows:-

Q1. Option (a). I will renew FD at current rate. FD is my emergency kitty.

Q2. Option (a). I will go for growth option. For me, my money in stock is like in a Casino. I allocate less to the market, but go full steam.

Q3. Option (a) or (c). Depends if I or my wife wins out. My wife goes for physical form, I go for paper form.

Q4. (a) i will sell the entire 500 shares. I go in the market for price variation. If the share is stagnent, sell when you can. Who knows when it will again show some movement.

Q5. (a) I will use the peak to sell at 30%. When the company values the share at 15% high, and market at 30%, sell for 30%.

Q6. (b) I will sell all at once.

Motilaloswal said...

Actually is very hard decision making regarding investment profit returns. Shares and Stock Market no doubt gives good investment returns in very short period of time.

Ganesh J said...

Q1. (d) Invest it in mutual fund units, I would invest in Mutual Funds and then come back to FD when rates increase in FD
Q2. (a) I would choose growth option
Q3. (c) buy gold ETF Units
Q4. (b) sell 250 shares and reduce your holding cost on the balance shares
Q5. (b) wait for the dividend and stock split and then decide
Q6. (b) sell your entire holding at the current market price

Titu said...

Hello Sir,

May be I don't understand this reader exercise as I didn't find my answers in options available


Q1. Your fixed deposit of Rs 100,000 in a bank has just matured. Will you:
Sir It will totally depends on my asset allocation plan

Q2. You have decided to purchase mutual fund units in an equity fund. Will you:
I don't know much but I always consider that growth option and the dividend re-investment option are equivalent (?) and as I don't know the difference between them I will blindly choose one of them.

Q3. Every one seems to be buying gold and gold prices are at an all-time high. Will you:
I am again sorry to say but I will go as per my Asset allocation plan.

Q4. You had bought 500 shares of a small cap company about 2 months back. After stagnating for a while, the price recently shot up by 25%. Will you
Answer (b) sell 250 shares and reduce your holding cost on the balance shares?
my decision will depends on my Asset allocation, market situation and mostly company performance or future prospects but assuming everything normal, mostly I will reduce the cost of holding and invest it some where else with better prospect, but not 250 share I will sell out 100 share

Q5. You had bought 1000 shares of another small cap company about 6 months ago. The stock has been stagnating since then. A recent announcement of 20% dividend and a stock-split perked up the price by 10%. Will you:
Answer (a) use the up-tick in price to sell out? Again my decision will depends on my asset allocation, market condition and company performance and future prospect, if everything normal and other option available I will sell out


Q6. You have been holding a well-managed mid cap MNC company's stock for a couple of years. The company recently announced delisting of its shares from the stock exchanges at a buy-back price that was 15% higher than market. Subsequently the price has spurted by 30%. Will you:

Answer (d) sell to the company at the announced buy-back price? again my FEAR will take the action b'cos I still don't know what to do with the share, once company get delisted so I will sell out as early as possible and at higher price which will available, but if they are giving good dividend (dividend yield more than FD Interest rate) then may be I will hold it, just to receive the dividend every year

Thanks for this reader exercise and please guide me as many things I don’t know

-titu

SUJAI said...

Q1.(b) Keep it in your savings account till the expected interest rate increase takes place, and then renew or will invest in shares if they come low.
Q2.(b) the dividend re-investment option
Q3.(d) refrain from buying till prices drop
Q4.(b) sell 250 shares and reduce your holding cost on the balance shares
Q5.(b) wait for the dividend and stock split and then decide
Q6.(a) hold on with the hope that the company may increase the buy-back price,

Subhankar said...

Thanks every one for participating. Hope there will be some participation over the next few days.

@Titu: 'As per my asset allocation' is not an option given - so you need to choose from the existing options. This is an exercise.

@Motilaloswal: The questions are not that difficult to answer! Why don't the 'professionals' show us amateurs how to take investment decisions with your answers?

SUJAI said...

Dear Sir
Salute to u!!! for your good work.

Eswar Santhosh said...

1) Though it's a "simple" question, there's no right answer. If this is part of my debt asset allocation / emergency funds / funds saved for a purpose and close to the goal, I'd leave it in FD. If this was a part of the "cash" portion of my portfolio, depending on valuations, I might invest in shares. If there's no such opportunity, I might lock them in a short-term FD and review when it matures.

2) May be it's my "old age" thinking, but I prefer dividends. After all they are tax free and will continue to be even with DTC.

3) Gold is a hedge or is supposed to be. But right now, I don't have great vibes about Gold. With investment fund flows chasing the asset for want of "safety", it still might appreciate 50%. But, I'd hold on to the 2% (lesser now due to stock price appreciation) Gold ETF and sell when I no longer feel comfortable. If I MUST invest, it will be through the ETF route.

4) The "right" answer would be I may even add if the future is brighter. But, I hardly ever do that. I'll book part profits, though I imagine for less than 250 shares. If it was 250%, then I think I'd evaluate a lot differently ;)

5) Can you secretly share with me the name of the stock? ;) I actually like such stocks, where I can login once a week, add some, wait sometime, add some more etc., It's not the current price level or how the market evaluates now that is important. If I had actually sit down, analyzed and studied, why should I worry what the market did for the last 2Q? On the other hand, announcing dividend, stock-split etc., by a small-cap company unless earnings backs it up is slightly risky as promoters might be perking up prices. If I had made a mistake in analyzing the stock, followed by committing another mistake of holding on due to loss aversion, then it's a great time to sell.

6) Submitting for an open offer, waiting for shares to be accepted etc., is a lengthy, time consuming, form filling process. I usually avoid losing my energy like that. In such a scenario, I'd sell through the market route in parts. Since the market price is above the offer price, a company desperate to delist would increase the offer price and market price would follow.

Rsuvarna said...

Q1 (a) It is better to renew the FD with the bank itself even though the returns are lower due to the present world economic scenario and the plight to safety

Q2 (a) I will choose the growth option as i am in late 30's and i do not need regular income.

Q3(c) Buy gold ETF's. Gold is safer asset compared to equities in current times of debt crisis looming everywhere.

Q4 (b) I will sent 50% for 25% profit and ride the rest for any further uptrend.If the price goes down, doesn't matter as i have covered my cost earlier.

Q5 (a) Use the uptick to sell out. Fundamentally stock split does not add any value to the stock and inturn will increase the supply which may bring down the market price.

Q6 (c) sell 80% and hold the rest for any further gain. This will allow me to capture the maximum gain and also take a little chance to encash any further upside for balance qty.

Sumanta said...

1. (C) My preference would be not to allocate the FDs to other assets, hence would reinvest in other FDs offering higher rates. I might stick to the same FD as well if i find that the time and effort to switch to a new FD (with other banks) is quite laborious and more (e.g. paperwork, visiting to the branches etc. etc.)
2. (A) I will always go for Growth option as MFs investment are on a SIP basis and hence long term.

3. (C) Here again i will go for SIP basis rather than investing in one shot when the prices are high. Off topic, i also invest in the Gold schemes offered by the Jewellers where the returns are almost > 20% pa but the only downside is you need to buy jewellery with the maturity amount which works for me given my age.
4. (B) Coz rising by 25% in 2 months flat is good returns. However at the same time will also check the reasons for price spurt. If the fundamentals are even more promising may be go for (D). But in any case, would resort to some profit booking whether its 50% or not, depends.

5. (B) generally the prices come down gradually post stock split hence would wait and then decide. If the company has done stock split there has to be some reason, it would be better to find that first and then decide.

6. (B) If the MNC company has decided to delist then i would offload my entire portfolio using the 30% uptick.

Titu said...

Hello Sir,

I think options are very much limited and may differ with slight change in situation

Q1. Option (b) Keep it in your savings account till the expected interest rate increase takes place, and then renew?
As inflation is in double digit and RBI may increase interest rate before July 2010, but not significantly so I will wait for that to happen and get whatever increase in rate I will get to renew my FD, I think that interest rate will move higher this year but not much.
At this stage when Sensex is close to 52 week high, I will not invest in mutual fund or shares.
About company FD, I simply don’t trust them

Q2. Option (a) Choose the growth option? Or (b) The dividend re-investment option?
I am NOT going to select the option ‘C’ just b’cos it will not give me the advantage of compounding interest, I select equity component for faster growth of my portfolio, so why take money out of it

Q3. (d) Refrain from buying till prices drop?
I don’t like to buy at top.

Q4. Option (b) sell 250 shares and reduce your holding cost on the balance shares?
So I will have cash to invest somewhere else with better prospect

Q5. Option (a) use the up-tick in price to sell out?

Q6. Option (c) sell 80% of your holding now, but keep 20% aside in case the company increases the buy-back price?


-titu